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TMI Blog2001 (5) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of provision made on account of revenue recognition on percentage of completion method. The same is accordingly deleted. This ground accordingly succeeds. 3. The next grievance of the assessee is that the learned CIT(A) is not justified in confirming the addition of Rs.31,51,000 on account of warranty provision made in the accounts. The facts and arguments of both sides are identical to those discussed by us in I.T.A No. 157/Pune/1995 for the earlier assessemnt year i.e. 1990-91. As such the decision given by us in the aforesaid order will apply mutatis mutandis to the facts of the present case. For the reasons discussed therein we hold that there is no justification for the impugned addition of Rs.31,51,000 on account of provision made in respect of warranty in the accounts. The same is accordingly deleted. This ground accordingly succeeds. 4. Ground No. 3 raised by the assessee reads as under: "The learned CIT(A) erred, while working out the disallowance under section 37(2A), in restricting the company's claim for deduction on account of participation of the company's officials in the business launches extended to the customers in the normal course of the company's busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asmuch as he, directed the Assessing Officer to treat 20% of the expenditure to be attributable to employees out of total lunch expenses of Rs.1,41,138. 6. The facts and arguments of both the sides are identical to those discussed by us in I.T.A. No. 157/Pune/95 for the assessment year 1990-91. For the reasons discussed therein we direct the Assessing Officer to allow 50% of the total expenditure on business lunches as attributable to employees. This ground accordingly succeeds. 7. Ground No. 4 relates to the disallowance of investment allowance of Rs.3,60,096. During the course of assessment proceedings, the Assessing Officer noted that in the computation of income, a sum of Rs.3,60,096 was claimed in respect of investment allowance on Plant and Machinery (including computers) purchased in the accounting period ending 31-3-1989 and 31-3-1990. It was submitted before the Assessing Officer that in the earlier year the claim could not be claimed in view of the losses. The Assessing Officer disallowed the claim on the ground that in the returns for the earlier years i.e. 1989-90 and 1990-91 neither investment allowance had been claimed nor allowed. The Assessing Officer further held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding year in which the machinery is put to use but rather, the deduction is allowed 'in respect of the previous year' in which the machinery is installed or, as the case may be is put to use. Sub-section (1) of section 32A therefore, has only a limited though vital role of crystallising the eligibility of investment allowance with respect to the year of installation or use and such year is to be reckoned with for the purpose of computing the period during which the assessee is not entitled to sell or otherwise transfer the asset etc. on which investment allowance is claimed [section 32A(5)(a)]. The learned counsel further submitted that the investment allowance in respect of which the eligibility is crystallised in terms of sub-section (1) of section 32A is not allowed to enter the stream of computation of total income unless there is sufficient total income to contain such allowance, such total income being computed after making all the deductions other than the deduction under section 32A itself and the deductions available under Chapter VIA. In other words, the amount of investment allowance is not allowed to convert income into a negative total income. At best it is allowed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the machinery on which investment allowance was claimed was not installed during the previous year. Therefore, neither the Assessing Officer nor the CIT (Appeals) had gone into the question whether the assessee fulfils other conditions i.e., whether machinery was used for the business or machinery was such as to be eligible for investment allowance. The learned D.R. further submitted that part of the machinery installed has been described as computer the Hon'ble Pune Bench of the Tribunal in the case of Dy. CIT v. Kirloskar Cummins Ltd. (IT Appeal No. 1287 (Pune) of 1990 for Assessment year 1985-86), Sunnygold Wineries (P.) Ltd. v. Dy. CIT (IT Appeal No. 1288 (Pune) of 1993 for Assessment year 1990-91) and in the case of UBS Publishers' Distributors Ltd. v. IAC [1991] 41 TTJ (Delhi) 499 held that no investment allowance is allowable on computers. Therefore, if the present issue is to be decided in favour of the assessee, the matter may be restored to the file of the Assessing Officer for finding out whether or not the assessee fulfils the other conditions. 12. The learned D.R. further submitted that as per section 32A the assessee can claim investment allowance only in the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procurement of material, inventory control and for generating critical information for effective plant management. 14. So far as the allowance of investment allowance on merits is concerned, the same is not allowable in view of the judgment of the Supreme Court in the case of Shri Shubhalaxmi Mills Ltd. In this case, the Hon'ble Supreme Court has clearly held that in order to claim the deduction on account of development rebate under section 33(1) of the Income-tax Act, 1961, it is obligatory that the debit entries on the profit and loss account and the credit entry in a reserve account should be made in the relevant previous year in which the machinery or plant is installed or first put to use. It has further been held that in view of the Explanation added with retrospective effect from the commencement of the Act, to clause (a) of section 34(3) it is clear that what is contemplated is the creation of a reserve fund in the relevant previous year irrespective of the result of the profit and loss account disclosed by the books of the assessee. Mere book entries will suffice for creating such a reserve fund. The debit entries and the entries relating to the reserve fund have to be m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. After going through the order proposed by my learned Brother and having discussion at length with him, I have not been able to persuade myself to agree with the conclusion arrived at by him in para No. 3 of his order regarding deduction on account of provisions made for warranty liability. Therefore, I proceed to express my dissenting view. 18. The claim of the assessee has been allowed by my learned Brother following his order in assessee's own case in ITA No. 157/Pune/95 for assessment year 1990-91. For the reasons given by me in the dissenting order in paras 45 to 62 in that case it is held that CIT (Appeals) was justified in confirming the disallowance of Rs.31,51,000 on account of warranty provisions made in the accounts. Accordingly, the order of CIT (Appeals) is upheld on this issue. However the 'A' would be entitled to deduction in respect of actual expenditure. 19. Except as stated above, I agree with the rest of the proposed order. Per Chhibber (A.M.) - The assessee is a public limited company and is engaged in the business of designing, engineering, fabrication, procurement and assembly, erection, installation and commissioning of Ground Boilers with the help of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; Rs. 60,36,000 --------------------------------------------------------------------- The assessee contended before the Assessing Officer that the provision of Rs.60,36,000 was liable to be allowed as the company regularly followed percentage of completion method and amount of revenue recognized is determined by reference to stage of completion at the end of the accounting period. It was further stated that for convenience of execution of job and supplies of various components required for assembly of Boiler at site, a price break up is preferred and approved by the client before commencement of the supply. Material costs were booked against the job and same were also recognized at job level. It was also stated that provisions were made for all the jobs in progress where the consumption was short of the expected cost of the job as well as booked. The Assessing Officer noted that the assessee was accounting for its sales on the basis of sales bills prepared upto completion of work. As far as expenses were concerned, they were accounted for as and when incurred though sometimes the assessee had incurred less expenses in comparison with the estimated cost. In such cases, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the assessee, the CIT(Appeals) has further erred in mistaking the simple surplus per se (invoice - cost price of the despatches) such profit for the year, without understanding the central fact that there is only one profit of an indivisible long-term contract, a portion of which is to be disclosed for the year as envisaged by the percentage of completion method and as such annual profit is a representative of the estimated profit of a long-term contract as a whole, necessitating provision in the accounts to ensure that the surplus disclosed during the year referred to above is brought in line with the estimated profit expected of the contract. He drew our attention to year wise provisioning made for equalisation contribution:-- --------------------------------------------------------------------- Rs. in lakhs --------------------------------------------------------------------- Assessment Provision Reversal Charge/ Year at the end of &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for the purpose of finding out the profit on the basis of percentage of completion method as the provisioning is by way of distribution of profit for the contract to various previous years for which the contract was in progress. In other words according to the learned counsel, it is in the nature of profit rationaliser, divider, allocater, etc., in order to determine profit of each year during which contract was in progress. In the year of completion of contract ultimately true profits emerged and such profits are not interfered with. In other words, ultimate profit in the year of completion of the contract also includes stage by stage profit as worked out by the assessee-company and in that sense profit from the contract as per the books of account is fully accepted. The learned counsel submitted that the assessee has worked out the profits on the long-term contract as per well accepted norms of accountancy. In this connection, he drew our attention to the extracts from Standard Books of Accountancy placed at pages 134 to 171 of the paperbook. In the Book Keeping and Accounts 16th Edition Page 301 by Spicer & Pegler under the head long-term credits, it has been stated-- "Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC). 7. CIT v. U.P. State Industrial Development Corpn. [1997] 225 ITR 703 (SC). 8. Madras Industrial Investment Corpn. Ltd v. CIT [1997] 225 ITR 802 (SC). 9. P.M. Mohammed Meerakhan v. CIT[1969] 73 ITR 735 (SC). 10. Chainrup Sampatramn v. CIT [1953] 24 ITR 481, 486 (SC). 11. Badridas Daga v. CIT[1958] 34 ITR 10 (SC). 7. Shri Naresh Kumar, the learned D.R. strongly supported the orders of authorities below. He submitted that for computing the profit for any assessment year, the following points have to be considered: (i) Whether the income has accrued to the assessee? (ii) How the assessee treats the profits? (iii) Whether profits have accrued? (iv) Whether the accountancy principle would overrule the provisions of income-tax and whether shifting of the profit as has been done by the assessee is permitted? Coming to the first point, the learned D.R. submitted that it is clear that the receipts which have been received by the assessee have accrued to it. All the payments have been received in pursuance of the contract. Therefore, it cannot be said that the income had not accrued to the assessee. In this connection, he relied upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , stated that the only decision which can help the assessee is the case of Calcutta Co. Ltd. But, in the said case, assessee had offered for taxation the total receipts and claimed deductions on account of liability, which that assessee had incurred in subsequent years not in order to fulfil the contractual agreement. According to the learned D.R., under the peculiar circumstances, the Supreme Court allowed that deduction on account of liability to be incurred in subsequent year. However, in the instant case, the receipts had been received by the assessee during the assessment year and that these receipts have been earned by the assessee by performing the job as envisaged in the contract. For earning the receipts, whatever expenses have to be incurred as for the contract, have already been incurred as per the terms of payment; payments are to be made only after production of the certificate that the relevant work has been done. In other words, raising of bills tantamounts to the completion of relevant portion of work. Therefore, he learned D.R. submitted that, so far as these receipts are concerned, the assessee has not incurred any further expenses. Therefore, he submitted that ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-company and in that sense, profit from the contract as per the books of account is fully acceptable. 13. In the case of Guttoffnungashutto Sterkrado, the Hon'ble Orissa High Court, in effect held that income determined in respect of long-term contract as per its books of account covering the entire period of contract and the net income so ascertained was apportionable over the four years in question on the basis of yearly turnover - again highlighting the principles of measurement of yearly profit in the case of percentage of completion method used in the case of long-term contracts. In the case of M.N. Dastur & Co., the Calcutta Bench of ITAT, following the judgment of the Hon'ble Supreme Court in the case in Guttoffnungashutto Sterkrado held that the basis of Accounting Standard issued by the Institute of Chartered Accountants of India i.e., AS-7 is a well recognised method and the assessee was right in following the same. 14. In the case of CITv. UP. State Industrial Development Corpn. the Hon'ble Supreme Court held as under: "In order to determine the question of taxability, well-settled legal principles as well as principles of accountancy have to be taken into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arguments of the ld. D.R was that method of accounting should not violate provisions of charging section and for this he relied upon the decision of the Madras High Court in the case of CITv . C. Rai [1979] 119 ITR 573. After going through the details of the method of accounting adopted by the assessee, we do not find any violation of the provisions of the charging section. As regards the reliance plated by the ld. D.R on the judgment of the Hon'ble Madras High Court referred to, the Hon'ble Madras High Court was considering the case of a nonresident assessee. The method of accounting applied was such that in the opinion of the High Court, the income earned in India could not be brought to be charged at all under section 5(2). In the case of the assessee, the position is different; the charge is not at all defeated; it is only rationalised. 17. Coming to the judgment of the Hon'ble Supreme Court in the case of British Paints Ltd. relied upon by the ld. D.R, we hold that the ratio does not apply to the facts of the present case because in that case, the system of accounting adopted was such which excluded, for valuation of stocks in trade, all costs other than the cost of raw-mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost. It was not allowed to suffer any tax thereto by considering such income as a separate entity particularly when there is no legislative mandate or negation to the contrary. 19. In the light of the above discussion, we hold that there is no justification for the impugned addition of Rs.60,30,000 on account of provisioning made on account of revenue recognition of percentage of completion method. The same is accordingly deleted. This ground accordingly succeeds. 20. The next grievance of the assessee is that the ld. CIT(Appeals) is not justified in confirming an addition of Rs.11,64,000 on account of warranty provision made in the accounts. During the course of assessment proceedings, the Assessing Officer noted that the assessee-company had debited a sum of Rs.11,64,000 as provision for warranty. This amount had remained unpaid/unadjusted and therefore, had been shown as liability as on 31-3-1990. The Assessing Officer called upon the assessee to explain the nature of this provision. The assessee submitted that contracts with customers imposed warranty obligation. The company had to replace defective components during the warranty period. The assessee had made provision on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the invoices raised as per the billing schedule will be necessary foreseeable warranty cost. For the accounting year 1989-90, i.e. assessment year 1990-91, against the warranty provision of Rs.11.64 lakhs, total cost incurred amounted to Rs.10.78 lakhs. For accounting year 1990-91, i.e., for assessment year 1991-92, against the warranty provision of Rs.31.51 lakhs (43.15 lakhs minus reversal of last year's provision of Rs.11.64 lakhs) the actual cost incurred for the said provision amounted to Rs.32.31 lakhs. Currently, the measure of estimating the warranty cost is materially changed, where it is made on the basis of job classified as hereunder: ------------------------------------------------------------------------ (a) High pressure of FOAX or new technology jobs 2% (approx) (b) No FOAK: 0.5% (approx) (c) Exactly repetitive jobs viz. sugar boilers, FM&nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were in existence. Similarly, according to the ld. D.R. the decision of Voltas Ltd. is also not applicable because in that case the decision of Pune ITAT in the case of Wanson (India) Ltd. has been followed. Further, in Voltas case, the ITAT has not considered Rajkumar Mills Ltd.'s case even though the same was cited before the Bench by the Department. As regards the reliance placed by the Ld. counsel of the, assessee on the case of Mitsubishi Motors NewZealand Ltd. the ld. D.R submitted that the decision was delivered under the Income-tax Act of New Zealand and there being material difference between the provisions of Income-tax in New Zealand and Income-tax in India, the said decision has no relevance. The ld. D.R. accordingly, concluded that the action of the authorities below deserves to be upheld. 24. We have considered the rival submissions and perused the facts on record. In the case of manufactured capital goods, invariably, a provision is made in the contract that should any deficiencies and infirmities be found in its working, then, for certain period, the suppliers will undertake, free of cost, to remove such deficiencies or infirmities which prevent the promised work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it supports a universal principle of measurement of profit. 25. In the case of Wanson (India) Ltd. decided by this Bench, the assessee was supplying industrial machines along with certain guarantees by way of warranties for their performance. The experience of the company showed that it, invariably, had to incur some expenditure on replacement of parts. Therefore, it attracted a practice of creating a provision for such expenditure and excess provision so used is to be written back in the accounts for the next year. The Assessing Officer did not allow such excess provision on the ground that it was only an estimate amounting to contingent liability and the same basis given by the Assessing Officer in the case of present assessee before us. On appeal, the Tribunal held that no doubt, the provision made was contingent at the time when it was made, but such estimate was based on the assessee's experience in the earlier years. The assessee knew for certain that some expenditure had to be incurred and as a prudent businessman, had to make a provision which approximated to the amount of expenditure. The method followed was consistent and therefore, there was justification for allowing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantified the entertainment expenditure as under:-- ----------------------------------------------------------------------- (1) Business lunch Rs. 1,47,523 (2) Out of travelling Rs. 33,170 (3) Club Rs. 1,009 (4) Out of canteen expenses Rs. 5,000 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious deductible expenditure under section 36(1)(iii)." At the time of hearing, this ground was not pressed and the same is accordingly dismissed. 32. Ground No. 5 reads as under: "The learned CIT(Appeals) erred in not accepting the appellant's ground for deduction of pro rata lease premium in the amount of Rs.46,163 by amortization of such lease premium paid to M.I.D.C in respect of land taken on lease." It is the common contention of both the sides that the issue stands covered against the assessee and in favour of the Revenue by the decision of this Bench in the case of Maharashtra Scooters Ltd. in IT Appeal No. 870/Pune of 1988. We accordingly dismiss this ground. 33. Ground No. 6 reads as under: "The learned CIT(Appeals) erred in not accepting the appellant's contention that the provision in the amount of Rs.24,41,000 towards royalty and technical know-how fees payable to foreign collaborators ought not to have been disallowed by the Assessing Officer since on the facts and in the circumstances of the case, requirements of section 40A(i) were satisfied." At the time of hearing, this ground was not pressed. The same is accordingly dismissed. 34. Ground No. 7 (last ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the starting point of computing of taxable income is the commercial profit derived on the basis of applicable principles of accounting and such profits can be disturbed only if the Legislature provides to the contrary. 39. On this footing, the Supreme Court in the case of Metal Box upheld the contention that an estimated liability under a Gratuity Scheme, even if it amounted to contingent liability, was deductible while preparing the Profit & Loss Account if the quantum thereof is properly ascertained by section 36(1)(v), actual contributions made to an approved Gratuity Fund were admissible as deductions. 40. Now, coming to the decision of Shree Sajjan Mills Ltd. it may be taken note of that the Court was dealing with the situation of the amended law which witnessed insertion of section 40A(7) which specifically provides that no provision for Gratuity will be allowed as a deduction unless the provision is under the auspices of an approved Gratuity Fund. This was a clear case where the Legislature stepped in an unequivocal manner and specifically provided that notwithstanding the principles of accounting, the provision for Gratuity simpliciter without the obligation to han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loying a regular method of accounting in the process of drawing up the accounts. A deduction could be allowed by the assessee by invoking the fundamental provisions of section 28 can only be with regard to the method of accounting regularly employed. From the above, following two points emerge: (a) an expenditure which is of contingent nature cannot be and must not be allowed to be deducted under section 37(1); (b) a deduction which is claimed on the touchstone of section 28, on the basis of accounting principles must be so claimed by employing a regular method of accounting in drawing up the accounts. That is to say, an assessee cannot be heard to say that an estimated liability for warranty obligation should be allowed under section 28 without following the proper grammar of accounting principles and employment of regular method of accounting in drawing up the accounts which take into reckoning such provision. The other choice with the assessee is to claim the deduction on the basis of actual incurrence by resort to the second option of section 37(1). 43. The second case of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. need not be considered in mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Boilers were still in the construction stage though the amounts received from the customers have been shown as sales consideration. It is on the basis of such sale proceeds that provisions for warranty have been made by the assessee at the rate of 2% of the billing price. A copy of the contract with M/s. Deepak Fertilizers has been placed in the paper book appearing at pages 1 to 15. The relevant term in the contract at page 9 of the paper book reads as under:-- Clause 1.11 Guarantee "You shall guarantee the equipment for design, workmanship and material for construction for a period of 12 months from the date of commission or 24 months from the date of despatch whichever is earlier". The claim made by the assessee on the basis of above clause has been rejected by the Assessing Officer as well as CIT(A) on the ground that liability is contingent one. 47. The contention on behalf of the assessee is that its business profits and gains which are chargeable to tax under section 28 and therefore, the same are to be determined/understood in the commercial sense. According to Mr. Khare, the ld. counsel for the assessee, the profits and gains of the business must be determined first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sajjan Mills Ltd. is distinguishable in the sense that in that case, the Court was concerned with deduction of gratuity liability under section 37 read with section 40A(7) and not under section 28. Since there was specific provision in respect of gratuity, the said decision cannot be applied to the facts of the present case. (d) As per para 42 of the order, it has been finally concluded that liability of contingent nature cannot and must not be allowed under section 37, but it can be allowed if it is claimed on the touchstone of section 28 itself. 50. After giving my deep thoughts to the aforesaid propositions, it is my view that claim of the assessee is not allowable for the reasons mentioned hereafter. There is no difference on the opinion that liability on account of warranty is contingent in nature inasmuch as it accrues only when the defect in the item manufactured by the assessee is notified by the customer. If no defect is notified, no liability would accrue. This proposition has not even been disputed by the ld. counsel for the assessee. Further, there is no dispute between us on the point that such claim of the assessee cannot be allowed under section 37 (see para 42 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of sugarcane grown by them exclusively to the assessee at the current market price and to have the advances adjusted towards the prices of sugarcane to be delivered to the assessee-company. In certain cases, the growers could not grow sugarcane due to drought and the advances remained not recovered. Accordingly, the loss arisen out of such transactions was claimed as deduction either under section 10(1) or 10(2)(xi) and 10(2)(xi) of 1922 Act. Their Lordships of the Supreme Court, after considering the earlier judgment in the case of Badridas Daga held at page 652 as under:-- "If an expenditure comes within any of the enumerated clauses of allowances, the case can be considered under the appropriate clause; but there may be an expenditure which, do not exactly covered by any of the enumerated clauses, may have to be considered in finding out the true assessable profits or gains. This was laid down by the Privy Council in CIT v. Chitnavis and has been accepted by this Court. In other words, section 10(2) does not deal exhaustively with the deduction, which must be made to arrive a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough it is disallowable under section 37. No doubt, such observations in the aforesaid Supreme Court judgment do support the case of the assessee, but, with all due respect it is stated that such observations are contrary to observations of the Hon'ble Supreme Court in the case of Badridas Daga and in the case of Mysore Sugar Co. Ltd. These decisions were delivered by larger Bench of three judges and four judges respectively while the decision in the case of Metal Box Co. Ltd. was delivered by Bench of two judges. Therefore, to that extent, the ratio of the judgment in the case of Metal Box Co. Ltd. does not hold good. It is to be noted that the afore said judgments of the Hon'ble Supreme Court delivered by larger Benches were not referred to before the Supreme Court in the case of Metal Box Co. Ltd. Had these judgments been referred to, such observations might not have been made by that Bench. In view of the above discussion the ratio of the Supreme Court decision in the case of Metal Box Co. Ltd. that a claim though not allowable under section 36(1)(v) could be allowed under section 28 is not binding and therefore to be ignored in view of the decisions of the larger benches in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. The former amounts were allowed as deductions, and the latter the Court of Appeal (reversing the decision of the court below) held not to be deductible. The basis of the decision was that the real liability under the contract was contingent, not actual, since the obligations of the company were not such that it might be sued for the cost of replacements at current prices, but only for possible damages for breach of contract in the event of the factory owner preferring a claim under the contract, and since no legal liability could arise until such a claim was made, the liability had to be regarded as contingent and not deductible." The aforesaid decision of the Court of Appeal was distinguished by the Supreme Court in the following words:-- "It is clear from the above that on the facts and circumstances of that case the court held that it was not an accrued liability but was merely a contingent one and if that was the case only the sums actually expended could be deducted and not those which the company was liable to expend in the future." 57. By distinguishing the decision of Court of Appeal, the Hon'ble Supreme Court has made a distinction between a liability which has accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so laid down was with reference to the law prevailing prior to insertion of section 40A(7) in the year 1973. Therefore, it is incorrect to say that this decision is distinguishable on the ground that their Lordships were deciding the issue with reference to section 40A(7). 60. As far as Accounting Standards are concerned, they are made by the Institute of Chartered Accountants keeping in view the provisions of Companies Act, so that the surplus may be determined for the purpose of distribution of dividends. If there is any possibility of certain liability being accrued in future in respect of the business carried on by the assessee, then it would be prudent for a trader to make provisions for such liability in the accounts, but on that account, it cannot be allowed as deduction if it is not allowable under the provisions of Income-tax. In this connection, reference may be made to Supreme Court decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd wherein it has been held that income-tax provisions would prevail over the accounting principles. Reference may also be made to recent decision of the Tribunal Bombay Bench in the case of Associated Capsules (P.) Ltd. 65 TT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ground boilers with the help of sophisticated technology for petrochemical, fertiliser, sugar and other industries. During the relevant years (assessment years 1990-91 & 1991-92), it made provisions for warranty in its accounts in the amounts of Rs.11,64,000 and Rs.31,51,000 respectively and claimed deduction in the assessments in respect of them. It was explained before the Assessing Officer that the assessee was under an obligation to replace defective components of the boilers during the warranty period and that the amounts provided represented the estimated liabilities in respect of the obligation. As per clause 1.11 of the Guarantee, the assessee "shall guarantee the equipment for design, workmanship and material for construction for a period of 12 months from the date of commission or 24 months from the date of despatch whichever is earlier". 3. The Assessing Officer was of the view that the amounts claimed were mere provisions made on estimated basis without there being any accrued liability and were therefore not allowable as deductions in computing the income. 4. The CIT(A), on appeal, was of the view that the amounts claimed were mere provisions in the accounts for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision even before the delivery of the boiler was of no relevance. He therefore allowed the assessee's claim for both the years. 8. The learned Judicial Member (JM, for short) could not agree with the view proposed by the ld. AM and would appear to have requested the latter to reconsider his proposed order in the light of the judgment of the Supreme Court in Shree Sajjan Mills Ltd.'s case. The ld. AM thereafter passed a sort of an appendix to his proposed order, wherein he gave reasons as to why he was unable to accede to the request of the ld. JM. These are contained in paragraphs 36 to 44. In short, he reasoned that the claim was allowable not under section 37(1) but under section 28 itself, that Sajjan Mills was not concerned with section 28 but was concerned with section 37(1) and was therefore not applicable to the present case. He further held that in Metal Box Company of India Ltd.'s case the Supreme Court itself has held that even a contingent liability is allowable as deduction in preparing the Profit & Loss account if the quantum thereof is scientifically ascertained. He ultimately held that - (1) the provision for warranty has been fairly estimated, (2) that making o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on past experience was not established and therefore it was not an ascertained or properly evaluated liability. He further observed that the "very possibility that there may not be any defect in the Boilers constructed by the assessee itself indicates that such liability is not ascertainable properly" and therefore the case of the assessee cannot be brought under the principle laid down in Metal Box Co. (India) Ltd. He also held that the claim was pre-mature, in the sense that the boilers, and the warranty liability starts only after they were delivered. In this view of the matter, the ld. JM disagreed with the view taken by the ld. AM and rejected the assessee's claim. 10. That is how the matter is now before me. I have heard the rival contentions. While the assessee placed reliance on the order of the ld. AM and reiterated the contentions that appealed to him, the Department placed reliance on the order of the ld. JM and reiterated the contentions that appealed to him. 11. In my view, the assessee is not entitled to succeed. Since the facts have been elaborately brought out in the orders of the ld. AM and the ld. JM, I have only adverted to them briefly. Both the ld. Mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 6 to the printed accounts, to which my attention was drawn on behalf of the Department. Thus, during the relevant accounting years, the liability under the warranty clause did not accrue at all. There was just a possibility that after the boilers are delivered, some defects may be noticed and the warranty clause may come into play. That is a future uncertain event. The provision, admittedly, had been made on the basis of Accounting Standards (AS-7). The object, in my view, of making such a provision is not far to seek it has obviously been made on grounds of prudence or as a measure of conservatism in the matter of accounting. That is certainly justifiable so far as the accounting aspect is concerned. But the claim for deduction of the provision has also to satisfy the principles of Income-tax law. Under the Income-tax law a contingent liability one which is dependent on the happening or not happening of a future uncertain event - is not considered deductible until such event has happened or until it has become impossible of happening. There is no finding in the order of the ld. AM that the provision does not represent a contingent liability but it represents a present liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore the warranty clause has not come into force and hence there is no question of enforcing the same. In other words, the assessee's defence would be that it is not under any liability to honour the warranty clause. An assessee following the mercantile system of accounting, as is the case with the present assessee, cannot seek to deduct a liability which has not accrued under the terms of the contract. It may be prudent accounting, but not sufficient to support the claim under the Income-tax law. I would prefer to distinguish Metal Box (India) Co. Ltd.'s case on this ground also. 13. To my mind, it appears that it is necessary for the assessee to satisfy the conditions imposed by the Income-tax law for successfully claiming a deduction in the assessment and if a deduction is claimed solely on the basis of commercial or accounting principles, it is further necessary to show that the claim is not inconsistent with or opposed to the principles of Income-tax law. Under the mercantile system of accounting, which the assessee follows, a deduction in respect of a contractual liability for warranty can be allowed only if the liability has accrued in the relevant accounting peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act on commercial or accounting principles. This decision was heavily relied upon on behalf of the assessee before me, especially the observations at pages 307 and 328-329, but I am unable to find anything in the said judgment which would support the assessee's claim for deduction of the contingent liability under the warranty clause, represented by the provision made in the accounts on the basis of AS-7, while computing its profits, under section 28 of the Act. 15. Several authorities were cited by both the sides in support of their respective contentions but I do not consider it necessary to deal with each one of them in view of the foregoing discussion. However, I consider it necessary to refer to some of the judgments cited on behalf of the assessee before me. One of them is the judgment of the Supreme Court in the case of Metal Box (India) Co. Ltd. which has already been considered by both the ld. AM as well as the ld. JM. The Id. AM in paragraph 39 has referred to this judgment and has understood the same as allowing deduction in respect of an estimated liability under a gratuity scheme, even if it amounted to a contingent liability. The ld. JM, however, has expressed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Ltd.'s case in paragraph 58. I agree with the grounds on which he has distinguished the said judgment. As regards the judgment of the Bombay High Court in the case of Tata Iron & Steel Co. Ltd. as I have already noted, there is no ruling in the said judgment that a contingent liability can be allowed as a deduction under section 28 of the Income-tax Act in that case, the assessee kept its accounts on the mercantile system of accounting and claimed deduction in respect of a provision made for gratuity liability under the Payment of Gratuity Act, 1972, on the basis of actuarial valuation. The High Court accepted the assessee's claim for deduction and held as incorrect a Circular of the CBDT which directed the Assessing Officers not to allow any liability towards an unapproved gratuity fund under section 37(1) of the Act. The case before the Bombay High Court was not one where the assessee sought deduction in respect of any contingent liability. Therefore, the question whether a contingent liability can be allowed as a deduction under section 28 of the Act, cannot be said to have been decided. 16. I therefore agree with the conclusion of the ld. JM that the provision made in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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